Iron ore: who will fill the emerging supply gap?
It’s been a bumpy first quarter for iron ore. The tragic tailings dam failure in Brazil caused a massive supply shock that has fundamentally altered our view of supply. Meanwhile, Australian exports were down in March after a series of tropical cyclones.
The ongoing uncertainty surrounding how long the incident in Brazil will impact production has changed the psyche of the iron ore market, leaving it particularly vulnerable to further supply shocks. This comes against a backdrop of continued demand growth from China and India.
While Australian exports have recovered, the outages from Vale will last much longer.
In response, we expect the iron ore price to hold comfortably above $80/t this year – but there are more questions than answers at this stage. Crucially, we don’t yet know by how much and for how long Vale’s production will be affected.
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Who will fill the emerging supply gap?
We forecast global exports of iron ore to fall by a net 25 million tonnes this year, a swing of almost 50 million tonnes from our previous forecast (before the tailings dam tragedy in Brazil).
Who will step in to fill the emerging supply gap?
There are a few options. The most likely source is Chinese supply. We expect at least 20 million tonnes of additional supply to come from China: existing mines will increase production, and stock drawdown will supply the remainder.
What about new projects? With an average construction time of at least three years, with a further two to three year ramp-up period, this isn’t a viable near-term solution.
The Indian market has some potential. However, we only see a small increase in Indian exports this year, due to growing domestic demand, lack of infrastructure and high inland logistics costs.
India is one of the most exciting potential markets in the world for steel, with huge untapped potential.
India primed to take over the baton from China
In the medium to long term, though, India is a rising star. While East Asian markets (including China) are expected to contract gradually, South Asia, Southeast Asia and the Middle East are primed for growth.
Chinese iron ore demand has just two years of growth remaining and is then expected to flatline. In contrast, the Indian market is set to pick up. Our base case sees India emerging as a significant importer of iron ore within the next 10 years, with imports reaching 100 million tonnes per year in early 2030.
Indian steel market has huge untapped potential
In the short term, Chinese steel demand looks positive and has shown unexpected resilience. Leading indicators such as housing sales signal healthy forward steel consumption from the property sector for the next two years.
Recent data from the housing sector showed a solid improvement, supported by lower mortgage costs, more accessible financing for developers and a relaxation of policy restrictions on urban household registrations.
After 2020, however, demand will approach peak plateau and is set to decline gradually.
In contrast, India is one of the most exciting potential markets in the world for steel, with huge untapped potential.
But there is a caveat to India’s potential: the money
To meet its future steel demand, Indian capacity needs to triple in 20 years.
This will require investment of more than US$160 billion by 2040.
Of this, around US$20 billion — comparable to Iceland’s annual GDP — has already been committed. How will India attract this level of investment?
At this year’s SGX week, we discussed India’s potential for growth. To learn more about the investment opportunity in this market, fill in the form on the page to download a complimentary copy of the presentation slides.